{"id":25338,"date":"2017-06-05T08:08:19","date_gmt":"2017-06-05T12:08:19","guid":{"rendered":"https:\/\/www.mrisoftware.com\/ie\/blog\/why-accounting-change-will-drive-ai-adoption-in-real-estate\/"},"modified":"2024-01-02T10:02:49","modified_gmt":"2024-01-02T14:02:49","slug":"why-accounting-change-will-drive-ai-adoption-in-real-estate","status":"publish","type":"post","link":"https:\/\/www.mrisoftware.com\/ie\/blog\/why-accounting-change-will-drive-ai-adoption-in-real-estate\/","title":{"rendered":"Why Lease Accounting Changes Will Drive AI Adoption in Real Estate"},"content":{"rendered":"

New lease accounting changes will prompt many more businesses to embrace evolving property management technology<\/strong><\/p>\n

The countdown has begun, but is your business ready for new lease accounting changes that will require all publicly-listed companies to account for the value of their leasing obligations on their balance sheets? If not, time is running out \u2013 the new standards come into force on 1 January 2019 \u2013 and new property management technology trends, such as the move towards artificial intelligence, may be your best hope of complying.<\/p>\n

The regulation, contained in the IFRS 16 regulation (or in Topic 842 in the US), means any business that leases real estate, as well as plant and machinery, will need to identify every single lease they\u2019ve signed, check whether it is within the scope of the new rules (some short-term leases are excluded), and assess its value so that the obligation can be included in its balance sheet.<\/p>\n

Vast numbers of businesses will have to respond to this reform. And while industries such as retail, leisure and travel, which hold large numbers of property leases on disparate sites, will be particularly affected, no company can afford to rest easily. One in two publicly-listed companies around the world will be\u00a0affected by the new standards<\/a> according to the International Accounting Standards Board and the US\u2019s Financial Accounting Standards Board, which are together driving the changes.<\/p>\n

The effects could be dramatic, warn analysts and accountants. At the supermarket group Tesco, for example, some analysts believe the company\u2019s debt will\u00a0double<\/a> to almost \u00a318bn under the new rules.<\/p>\n

However, it\u2019s not just the end result that businesses will have to deal with. Getting there is likely to be onerous too \u2013 many large companies are sitting on vast numbers of leases, covering real estate in markets all around the world and often held in disparate locations or by a large number of subsidiary companies. All of these leases must now be found and interrogated in order for businesses to make compliant accounting submissions from 2019 onwards.<\/p>\n

Conducting all of that work manually will be time-consuming, burdensome and expensive for many businesses, diverting resources that could otherwise be employed on supporting the company in its growth objectives. For that reason, many companies are now exploring technology-driven solutions as they work out how to respond to the lease accounting challenge.<\/p>\n

In particular, property management technology enthusiasts are focusing on artificial intelligence (AI) and deep learning tools, which look very promising in the context of the work required. The idea is that these tools will employ trained algorithms that will read each lease held by the company, identify and extract all of the data potentially required for inclusion on the balance sheet, and provide a decision on which of this data should be included under the terms of the new standards.<\/p>\n

In other words, AI has the potential to automate the process of IFRS 16 compliance \u2013 and to do so more efficiently and accurately over time, as the system learns from the increasing amount of data it has processed. Some manual intervention may still be required \u2013 to check the system is delivering the right data, for example \u2013 but this need should diminish over time.<\/p>\n

AI tools of this sort can also identify missing data that isn\u2019t included in a lease, but which the company needs to comply with the standards. This can feed through into processes for obtaining the information required. The tools can also interrogate the lease documents to check they\u2019re consistent and accurate \u2013 as\u00a0Emilio Matthaei<\/a> points out in one recent blog, this might help businesses establish that a lease which mentions an amendment, for example, actually includes this amendment on file.<\/p>\n

In short, for large companies with many leases, property management technology such as AI tools may now offer the best possible chance of getting accounting right before IFRS 16 comes into force \u2013 not to mention managing the burden of delivering compliance. \u00a0 Takeaways:<\/p>\n